Caruso Homes of suburban Maryland filed for Chapter 11 this summer with liabilities of more than $100 million. “We have so much debt right now that we need to clean up our balance sheet,” president Jeff Caruso explained to Builder in an interview upon filing. Caruso, who has put $10 million of his own equity into the company, hopes to emerge from bankruptcy later this year in fighting shape with a new operating plan. He wants to recreate his company as a smaller one, building 100 to 200 less-expensive homes a year.
Working, or Not Working, With Banks
Builders report that most banks, especially local banks with which they have long-term relationships, have been willing to do workouts on revolving lines of credit and land loans. Many builders having trouble making loan payments have been able to work out forbearance agreements, where the bank temporarily forgives interest or even principal. One prominent Las Vegas builder says that “virtually every” builder in the area has a forbearance agreement. Burns, who counts several Las Vegas builders among his clients, disagrees. “That is not true about every builder in LV,” he says. “Believe it or not, there are firms who come out of pocket to keep their reputation.”
Builders who didn’t sign personally on their loans may be able to give them back to the bank and walk from deals, though again that may tarnish the builder’s standing in the market. It’s not uncommon to see these same builders come back with new equity partners and buy the same property back from the bank at a lower basis. “A lot of guys are doing that now,” said a prominent California architect, looking across a room of builders and developers at the PCBC conference.
The problem today is that builders have lost much of their negotiating power with banks. Their cash reserves are down to nothing. They’ve already pumped their own equity into the operation. And many of the banks aren’t in a much better position. The window to renegotiate debt seems to be closing quickly. Houston’s Royce Homes, the 44th largest builder in America last year, announced last month that it would liquidate after its credit lines were cut. The company might have been able to build its way out of trouble. But without credit for operations, it couldn’t pay its debt.
Credit: Brian Stauffer
Enough builders are so angry about what’s happened between them and their banks that they’ve joined something called the Homebuilders Coalition for Responsible Bank Behavior. By late August, the association had 43 builder members, including Mick Pattinson, president of Barratt American, which was one of the 200 largest builders in this country before Bank of America cut off its $125 million credit facility. Pattinson, who has had to let go of 100 of his 130 employees, says that builders are “mad as hell, but they’ve been reluctant to put out their dirty linen about how they’ve been screwed over.” The Coalition plans to develop a Web site and hire a lobbyist and public relations person.
Publics Pulling Up Stakes
Though their moves have received less attention, public builders have been making difficult decisions of late to exit markets that they may have spent millions of dollars to enter. In many cases, CEOs for these companies spent years and a ton of dough on market studies, land, and infrastructure before making their move. They may have even sunk big money into buying a company to enter a market they coveted. Now, they are pulling up stakes because the operations are hemorrhaging money; they think they are better off with eggs in fewer baskets.
The Ryland Group recently announced that it had left Northern California after 20 years. Centex and Beazer exited Denver within months of each other. KB Home has pulled out of Washington, Chicago, and Albuquerque, N.M. With less fanfare, many publics have consolidated local divisions into regional offices. “Overall, in this type of market, I think it makes sense to cut your losses in non-strategic markets where you don’t have the volume to justify a presence and you aren’t optimistic about a turn in the next one to two years,” says J.P. Morgan’s Michael Rehaut.
Public builder analysts contacted for this story couldn’t provide numbers for what it has cost public builders to cut their losses in big-city markets. Beazer announced earlier this year that it was getting out of Charlotte, N.C., Cincinnati/Dayton, Columbia, S.C., Columbus, Ohio, and Lexington, Ky. It had entered some of those markets or expanded its presence in them when it purchased Crossman Communities for $600 million in 2002, including $191 million in cash that was financed with $350 million in private debt due in 2012.
“Yes, they definitely lose money when they exit,” says Ivy Zelman, president of Zelman & Associates. “How much, I’m not sure—usually it’s because they don’t have the scale to justify being there or they are bearish on the long-term outlook, i.e., Detroit. My guess is that they take the loss and never look back. A lot of mistakes were made and now are trying to be reversed at a big cost to shareholders.”
Meanwhile, people are watching to see whether the publics leave markets in an orderly fashion, finishing out subdivisions and making good on all their promises. The first ones to find out last month that Centex was leaving Denver were customers with contracts; they received letters. Even though Centex planned to build the customer’s home, the company offered the buyer a refund because Centex didn’t intend to complete the community, according to a letter obtained by the Genesis Group, a local market research firm. Centex announced the decision to the press days later, saying it will complete work on homes both in progress and sold, and that it will maintain a team in Denver to complete warranty work and support its buyers.
The same scrutiny is being given throughout the country to half-finished subdivisions. When builders or developers go bankrupt and can’t maintain the community, the public relations impact can be calamitous for every builder in the market. People who have already bought homes in a community speak out publicly about how the builder reneged on promises to build amenities, how unfinished homes are beacons for vandals, and how unmowed lawns and parks are hurting property values in their community.
A recent Tampa, Fla., newspaper story profiled a partially finished subdivision. It referred “to row after row of streetlights,” “white plumbing pipes sticking up out of the ground,” and common areas that weren’t maintained. It quoted people who already lived in the community who were very concerned about falling property values. A similar story in a Phoenix newspaper referred to a subdivision that resembled a “ghost town” with dried-out tumbleweeds that posed a fire hazard. The developer was bankrupt and the cash-strapped HOA couldn’t afford the clean-up.
That’s why, when Stanley Martin decided more than a year ago to cease operations in many of its suburban locations and instead focus on infill construction, the company budgeted to maintain its unfinished subdivisions. “We’re going back and cutting the grass in our undeveloped lots,” says Alloy. “In some of the neighborhoods, they are being used to play baseball ... . When the market is right, we’ll come back and build on them.”
Alison Rice, John Caulfield, and Ethan Butterfield contributed reporting to this story.